KLX Energy Services (KLXE) is a collection of domestic onshore energy services business. The company was originally formed in a series of acquisitions in 2013/14 by BE Aerospace (BEAV), as BEAV, an aerospace parts maker, thought they would be able to replicate their roll-up strategy in the US onshore energy patch, which at that time was booming. In retrospect, the strategy could not have been more mistimed, as the bottom fell out of the energy markets in 2015/16.
Fast forward several years, and KLXE is all that is left over from BEAV, as Rockwell Collins (which is now part of UTX) purchased the aerospace parts business, and Boeing (BA) purchased the aerospace parts distribution business, KLXI. Still in place at KLXE are BEAV architects Amin Khoury (BEAV founder and KLXE CEO), and Tom McCarthy (CFO of BEAV and now KLXE).
While near term fundamentals are choppy at best, we are currently attracted to KLXE for several reasons:
KLXE is an improved business since the 2016 downturn.
Notably, the company has massively increased their customer base since the trough of the last cycle as demonstrated by a near tripling of Master Service Agreements (400 in ‘16 to almost 1,100 today), along with a general increase in customers and average sale per customer.
KLXE has a very good balance sheet and would be more than capable of surviving another
KLXE has ~$86mm net debt, or about 0.5x FY20 net debt to EBITDA.
Liquidity is more than ample - cash on hand of $164mm and fully undrawn $100mm credit facility.
Ample room for mgmt to continue to execute upon their rollup strategy.
KLXE will likely not look for anything transformational (and covs really prohibit something like that).
They will, however, continue to look for bolt-on deals that would increase their offering in certain regions (i.e. something similar to their recent purchase of Motley, which they completed at ~3x ‘18 EV/EBITDA).
We believe the stock is cheap at ~3.5x FY21 EV/EBITDA (a year which we believe is likely categorized a mid-cycle year if not below mid-cycle).
And, management is aligned with shareholders and highly incentivized to sell KLXE.
Khoury and McCarthy each own substantial stakes in the company (Khoury holds ~5% shares outstanding, McCarthy ~3%).
Moreover, Khoury, McCarthy, and the entire Board of Directors are compensated 100% in KLXE stock.
Jhu2000 wrote up KLXI in May 2018, and I thought this description of the services KLXE provides was apt; “The business has been described to me as a locksmith to E&P companies when there are having issues with drilling (KLXE is always available to assist 24/7 but charges a premium for their services).”
Today, those services are wide ranging and generally relate to completions (~60% of rev), production (~20%) and intervention (15%-20%). Some of the larger services include wireline, coiled tubing, technical services, and rental.
KLXE very much competes against smaller, regional services companies, and per IR, they rarely compete much against the larger players like Baker Hughers (BHI).
At ~28/sh KLXE is trading around 3.5x FY21 (Jan year end) EV/EBITDA. This is at the lower end of the comp range. Valuing the stock at ~4.5x (inline w/ comps NINE, KEG) the stock is worth $36/sh.
Given strong incentives for mgmt to sell the company, KLXE could fetch a much higher multiple in a takeover scenario; at 6x FY21 EV/EBITDA the stock is worth $49/sh.
Near term, the operating environment is probably best described as choppy, and there is some risk that KLXE may need to trim guidance. With that said it probably makes sense to leave plenty of room to add to the position over the coming months.
Just recently, Jefferies initiated on KLXE w/ a Buy rating, though noted that their EBITDA estimate for this year was ~14% below current guidance (of $190mm).
And, just this past week, competitor RES cut guidance… With that, it seems like near term expectations for KLXE should be reasonably low.
Energy prices take a leg lower.
Mgmt unable to sell KLXE (as the business was put up for sale previously and the bids received were subpar).
Bolt-on M&A as deals.
Higher energy prices.
Stabilization of US onshore activity.
KLXE bought out.
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